Avast Tech IPO Making More Cash Than Spotify Has a Chance
(Bloomberg Gadfly) -- With investors getting cold feet about U.K. tech stocks like Sophos Group Plc and Alfa Financial, is now really the right time for another one to go public? Avast thinks so. The cybersecurity firm is eyeing an IPO valuation of about $4 billion, which would put it a slight premium to peers. Provided investors can get to grips with the business model, it's an achievable feat.
Avast is a pretty mature company with an un-trendy story to tell, which makes a nice change from the darlings of Silicon Valley. It made a loss last year on merger-related costs, but it is cash-rich: Net cash flow from operations was $306.5 million last year, almost $100 million more than Spotify's. Most of its growth investment is probably behind it, having reached the end of an expansion spree backed by private-equity investors.
The tricky part is explaining to investors what it does and how it makes money. Although cybersecurity is an obviously hot topic -- even Donald Trump gets it -- Avast is not your typical enterprise vendor, marketing a suite of sophisticated security products to rich conglomerates. It's more of a Symantec or McAfee-style firm offering its basic software for free to consumers and charging for extras.
That's actually not such a bad place to be. Even if offering anti-virus software seems less sexy than selling aggressively-named business solutions like "Intercept X," Avast has a big share of the market, with 435 million users worldwide. It uses anonymized customer data to improve its product and monitor patterns, which sounds creepy, but it seems to work in terms of getting users to upgrade. It also sells to mobile users via contracts with network operators. Revenue almost doubled last year, to $652.9 million, and operating profit rose about four-fold to $124.3 million.
Still, sentiment counts for a lot. Cybersecurity is a booming industry but it's a competitive one, and some pricier stocks have taken a hit: Sophos shares are down about 15 percent year-to-date on fears its rocket-fueled growth may be subsiding. Investors might need some extra hand-holding, says Mirabaud's Neil Campling, on the growth path for subscriptions and monetization.
Where Avast can reassure is on the overall global spending pie for IT security, which is set to grow to $96.3 billion in 2018, from $89.1 billion last year, according to Gartner. Avast's M&A spree has also boosted its reach and added new products to its range. Its core product is also free, a price that's hard to under-cut.
A valuation of $4 billion would suggest an enterprise-value-to-Ebitda multiple of about 11 or 12 times, higher than Symantec's 8.5 or McAfee owner Intel's 9.1. Provided Avast can ride the enthusiasm for all things cyber-risk while reassuring investors its market share and business model can be defended, it's not so demanding. With acquisition-related debt to pay down and a stock market that's seeing more volatility, Avast is unlikely to get a better opportunity than this soon. And in a market where volatility is on the rise, maybe investors are ready for a more boring brand of tech.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.
To contact the editor responsible for this story: Jennifer Ryan at jryan13@bloomberg.net.
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